Shadow Capitalism

Market Commentary by Naufal Sanaullah

Naufal Sanaullah Silver outperforms and Bush tax cuts extended in very quiet
naufalsanaullah@gmail.com
www.shadowcapitalism.com
trading session
I have been mentioning lately that precious metals, particularly gold, are behaving more as FX or
rates products rather than commodity metals, and this is obviously due to monetary policy. What I
mean by this is that I think we have returned to the “normal” situation in which bad US data leads
to USD selloffs, such as Friday’s NFP print.

The typical safe haven inflows are now being directed toward gold, I contend, and this is all a
function of the US Treasury market, as rising yields lead to and exacerbate this phenomenon. If
USTs are set for a 2011 decline, I expect gold to continue its sharply inverse performance versus
the currency facing judgment day at the moment. It tracked the euro inversely during its 2009-10
selloff, and then switched sides and began a high positive correlation with it, as EURUSD became a
proxy for the QE thesis that was leading to USD dumping. Case in point.

In stocks, the S&P pulled back a tenth of a percent in quiet trading with low volumes ahead of a
much busier rest of the week globally. Volumes were awfully low, with the SPY trading just over
100M shares, and my near-term bullish outlook on equity remains. Some more sideways action
would be constructive for an eventual 1225 breakout.

Some recent equity picks of mine have been breaking out in nice patterns from constructive bases,
and I’ve included some below. DRYS was a recent pick from just Friday, and it showed bullish
follow-through for its high-volume breakout on Friday. Coal stocks have also been performing very
well, including my long WLT, which broke out on strong volume on Friday from a tight
December 6, 2010|1
consolidation pattern following its November 19 breakout into 52wk highs. CNQ, a Canadian
energy stock, also broke out to 52wk highs lately, with me buying the breakout last week. Since
then, it has followed through on its move with strong volume confirmation and posted another
1.72% gain again today.

December 6, 2010|2
EURUSD sold off about a big fig today following the Friday post-NFP surge. As US rates markets
imminently see a continuation of their selling from last month, I expect EURUSD to come under
further pressure and periphery spreads to widen again. It is important to remember that unlimited
ECB liquidity is still sterilized liquidity and is a function of the credibility and perceived efficacy of
the EU & ECB. Politics are the biggest concern right now in the Eurozone and their implications on
markets will likely be considerable.

Lots of talk about an EU bond is being thrown around, but before any substantive deliberation,
there must be a determination as per how the ISDA would treat such an event and whether it
would qualify as a credit event. Furthermore, an EU-wide bond would all but imply a type of
unsterilized monetization, if not addressed as such outright, and I fail to see bullish EURUSD
scenarios except for markets continuing to be satisfied with temporary ECB liquidity. And that is
not to say it won’t be the case, given the sharply reversing and “irrational” nature of markets, but
after the response to the Irish bailout, I need to see much more before I can buy the ECB’s being
accepted by the market. €2b in weekly sterilized sov bond purchases is not a panacea.

Above 1.3450 could send it rallying considerably, but the important level to watch is DXY
80/EURUSD 3250, which if breached could send EURUSD pummeling.

Silver broke out for another >3% today, and volumes in futures, ETFs, and miner equities were all
very supportive. One of my holdings, SLW, took off for an almost 4% rally today, and today’s >6%
surge in AGQ is making me regret my selling it yesterday, in my rearview-judgment moment of the
day. Energy also outperformed today, with holdings like TGA doing very well. I booked partial
profits on a lot of my bigger movers today, as they are now getting quite extended from significant
moving averages and are increasingly at-risk for a correction.

December 6, 2010|3
On the political front, the White House has reached a compromise with the House to extend the
Bush tax cuts for two years, including for the top 2% of the income bracket. Meanwhile, the state
& local govt funding situation continues to deteriorate, now that the stage in the economic
recovery cycle in which tax receipts were expected to pick up has finally come, yet the tax growth
hasn’t due to a stubbornly high unemployment rate stemming from too-slow growth to help
alleviate it. What does this all mean? The market’s prevailing lending rates are being met with
disappointment and the market may turn vigilante on muni’s very quickly in 2011. Just take a look
at the NQC, a California muni ETF, below.

December 6, 2010|4
 Trades
OPEN
Long VECO | 39.00 | stop 36.30 | +20.87%
Long ACAS | 6.67 | stop 6.25 | +14.54%
Short EUR/CHF | 1.3725 | stop 1.3490 | +695 pips
Long USD/HUF | 195.45 | stop 192.70 | +140 pips
Short ACOR | 28.00 | stop 28.70 | +4.64%
Short /HG | 4.06 | stop 4.15 | +0.99%
Short AUD/USD | 0.9980 | stop 1.0075 | +100 pips
Long SGD/JPY | 63.60 | stop 62.95 | -35 pips
Long SNE | 33.70 | stop 32.30 | +8.52%
Long HIT | 47.35 | stop 44.80 | +6.71%
Long /NKD | 9768.00 | stop 9686.00 | +3.71%
Long EK | 4.79 | stop 4.30 | -2.51%
Long AMR | 8.22 | stop 7.90 | +1.95%
Long N | 24.00 | stop 23.20 | +11.25%
Long TGA | 14.65 | stop 13.45 | +32.29%
Long NOG | 22.20 | stop 21.80 | +9.82%
Long AAPL | 307.50 | stop 295.35 | +4.11%
Long CSTR | 63.45 | stop 58.15 | +3.51%
Long MAT | 25.25 | stop 24.80 | +1.94%
Long SNDK | 42.95 | stop 40.35 | +11.10%
Long CMCSA | 20.15 | stop 19.70 | +2.23%
Long REGN | 29.25 | stop 28.35 | +3.04%
Long VSAT | 40.75 | stop 39.90 | +5.18%
Long THRX | 21.65 | stop 20.55 | +21.52%
Long XEC | 81.00 | stop 78.15 | +7.75%
Long FWLT | 28.30 | stop 27.00 | +8.62%
Long GRA | 33.40 | stop 31.00 | +3.92%
Long VSH | 14.15 | stop 13.30 | +7.99%
Short GBP/USD | 1.5700 | stop 1.5850 | +0 pips
Long CHF/HUF | 208.00 | stop 205.00 | +60 pips
Long NG | 14.05 | stop 13.50 | +15.23%
Long SLW | 34.80 | stop 32.80 | +17.36%
Long X | 48.10 | stop 46.40 | +8.94%
Long MEE | 49.10 | stop 47.25 | +5.15%
Long WLT | 104.50 | stop 100.05 | +10.16%
Long BTU | 58.00 | stop 55.00 | +8.88%
Long RIMM | 60.50 | stop 57.70 | +4.68%
Long XTXI | 9.35 | stop 8.95 | +1.71%
Long SWC | 19.80 | stop 17.85 | +13.43%
Long PRX | 37.30 | stop 35.50 | +1.05%
Long AIN | 21.80 | stop 20.80 | +6.47%
Short AUD/CHF | 0.9700 | stop 0.9810 | -15 pips
Long CNQ | 40.60 | stop 39.20 | +4.78%
Short EUR/NOK | 8.050 | stop 8.080 | +70 pips
Short NFLX | 191.25 | stop 196.10 | -1.15%
Long DRYS | 5.60 | stop 5.35 | +10.89%
Long SOHU | 71.50 | stop 67.95 | +7.29%
CLOSED
Long UAL | 28.10 | sell 27.00 | -3.91%
Long BHP | 82.55 | sell 88.75 | +7.51%
Short CHK | 22.00 | cover 22.70 | -3.18%
Long SVM | 12.35 | sell 13.20 | +6.88%
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analysis and trade ideas, constitutes or should be construed as investing or
financial advice, suggestion, or recommendation. Please consult a financial
professional and do due diligence before engaging in any purchase or sale of
securities.

Long CIE | 10.85 | stop 10.10 | +17.79%

Long STT | 43.50 | stop 41.80 | +5.20%
Long PCAR | 54.95 | stop 52.00 | +1.42%
Short FRO | 26.10 | stop 27.00 | +1.49%
Short CCE | 24.00 | stop 25.75 | -5.50%
Long /CL | 85.00 | stop 82.80 | +4.59%
Short /NG | 4.33 | stop 4.60 | -4.39%
Long SINA | 63.75 | stop 62.05 | +8.63%
Long CLW | 80.80 | stop 78.50 | +0.84%
Long IO | 7.03 | stop 6.64 | +14.94%
Long /ZW | 690.00 | stop 675.30 | +16.96%
Long /ZC | 550.00 | stop 541.90 | +3.64%
Short GBP/SEK | 10.905 | stop 11.115 | +150 pips
December 6, 2010|5